New Study Supports 100% Equity Investing for Life

For years, conventional wisdom has preached the benefits of diversifying between stocks & bonds and gradually shifting to safer investments as we age. 

But what if these widely accepted strategies are fundamentally flawed? 

A newly published, high-quality study is flipping the script on traditional investment advice, making a compelling case for a 100% equity strategy throughout life.

This research, backed by robust data from 39 developed countries and spanning long-term investment horizons, challenges two key conventional wisdoms:

1. That savers should diversify between stocks and bonds.
2. That young people should invest more heavily in stocks than when they are older.

Instead, the study reveals that an all-equity portfolio—with a notable tilt toward international stocks—outperforms traditional stock-bond strategies in building wealth, ensuring reliable retirement income, and preserving capital.

In my latest YouTube video, podcast episode and blog post you’ll discover:

• Is this new study a high-quality study?
• What does the study prove?
• What is the effective way to diversify?
• In what 2 ways is diversifying with international stocks better than with bonds?
• Why should investors keep the same allocation to stocks as they get older?
• Is the all-equity strategy safe?
• Should we actually invest 67% into international stocks?
• What studies already on my blog agree with this study?

Is this new study a high-quality study?

The paper is titled, “Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice”. It was published on December 6, 2024 by finance professors Aizhan Anarkulova at Emory University; Scott Cederburg at the University of Arizona; and Michael S. O’Doherty at the University of Missouri at Columbia.

This study improves on past studies by looking longer term over the time of a typical retired couple, by fixing data issues such as survivor bias, and by including long-term data from 39 different developed countries.

What does the study prove?

“The study shows an optimal lifetime allocation of 33% domestic stocks, 67% international stocks, 0% bonds, and 0% bills vastly outperforms age-based, stock-bond strategies in building wealth, supporting retirement consumption, preserving capital, and generating bequests.”

In other words, 100% equities with 2/3 in international stocks has been far better than the 2 conventional wisdoms in providing high growth, higher retirement incomes, and more reliable retirement incomes.

What is the effective way to diversify?

“Investors should prefer international stocks to bonds for diversification. Bonds offer modest average real returns (0.95% annually) compared with international stocks (7.03%), necessitating strong diversification benefits to make bonds attractive. At short horizons, bonds appear less risky with lower standard deviation (9.51% versus 23.26%) and lower correlation with domestic stocks (0.21 versus 0.33). At long horizons, the picture changes. Bonds’ per-period variance increases to 2.30 times the one-year variance, but international stocks’ decreases to 0.75 times.

The correlation of bonds with domestic stocks rises to 0.45 at 30 years, whereas international stocks maintain a steady correlation.5. International stocks also help preserve real buying power with a low correlation with inflation (−0.01), whereas bonds do not (−0.78). Bonds ultimately seem unattractive for long-horizon investors. They have low returns, high long-term variance, high long-term correlation with domestic stocks, and high exposure to inflationary periods.”

In other words, bonds have a minimal return after inflation, offer low long-term diversification, are much riskier over long periods than short periods, and get killed by inflation.

“The optimal allocation avoids fixed income investments and chooses an all-equity strategy. This result may seem surprising given the vaunted diversification potential and safety offered by bonds. However, bonds become riskier and more correlated with domestic stocks as the investment horizon grows. The optimal allocation reflects the superior diversification benefits and growth potential of international stocks.”

In what 2 ways is diversifying with international stocks better than with bonds?

1. The all-equity strategy dominates the 2 conventional wisdoms with 50% more retirement wealth on average than the balanced strategy and 39% more than the target-date funds. This additional wealth generates a larger stream of income for retirees.
   For a couple saving 10% of their income into the all-equity portfolio to have the same retirement, they must save 19.3% of income with the balanced strategy – nearly twice as much. Target-date fund investors need to save 16.1% of their income – 61% more pre-retirement savings to provide the same retirement.

Note the study refers to target date funds as “lifecycle investing”. This is the conventional wisdom of investing more in bonds as you age. It is completely different than the “Lifecycle Investing Strategy” on my blog, which is the ultimate investment strategy for young people.

2. A surprising result is that the all-equity strategy also beats conventional wisdom in capital preservation. “Households allocating 33% to domestic stocks and 67% to international stocks are much less likely to exhaust their savings. Under the common 4% rule for retirement spending, a couple using the balanced strategy has a 16.9% probability of running out of wealth. Target-date funds are even worse at 19.7%. In comparison, the probability for the optimal, all-equity strategy is low at 7.0%.”

Why should investors keep the same allocation to stocks as they get older?

“There is no economically meaningful gain from holding bonds at any point during their lifetimes. The long-horizon return data suggest that diversifying with international stocks, rather than with bonds, improves investor outcomes for long-term appreciation and capital preservation.”

Note the “Ruin Possibility” is far lower for the all-equity optimal strategy.

Is the all-equity strategy safe?

“Drawdowns can inflict intense psychological pain, and one worry is that some investors will abandon their investments rather than stay the course. Contrary to common intuition, however, conventional wisdom with large bond allocations, carry the potential for even larger drawdowns in real terms. These strategies also expose investors to greater risk of exhausting their savings.”

In other words, bonds are less reliable for a 30-year retirement because they get killed by inflation.

“Our results, as a whole, do not suggest that the all-equity strategy is safe; they merely suggest that it is safer than common alternatives. Given the relative safety and strong growth potential of equities, retirement savers and retirees would likely benefit from adopting a “set it and forget it” strategy that fully invests in domestic and international stock.”

Should we actually invest 67% into international stocks?

The study looks at 39 developed countries all together. Having 33% in domestic stocks is the best allocation on average for all the countries. I’m sure this optimal allocation would be different for different countries.

For example, several countries, such as Chile, have negative returns during the study, while other countries, such as Czech Republic, Finland, South Korea, Norway and Mexico have returns between 7-10%/year after inflation. You would expect a country with a stock market that declines over years to have a lower optimal allocation to its own domestic stocks than countries with high long-term returns after inflation. Investing 33% into our own country when the stock market declines over many years is not an effective strategy.

I read blogs from American investors wondering why they should not invest 100% in the US. The US stock market has significantly outperformed the rest of the world the last several decades and US stocks are 74% of the world index today. Growth in the world is mostly in only a few countries, including the US.

The study says that diversifying with international stocks is much better than diversifying with bonds or cash. We also only have 150 years of good stock market data, so being all in one country is probably a higher risk.

The portfolio manager we work with actually has almost nothing in Canada. Canada is only 3% of the world stock market and is a lower growth country. They invest globally to get broad international diversification. Recently, they have been more heavily focused in the US.

What studies already on my blog agree with this study?

If you have been following my blog or YouTube channel, you would know I have seen through these common conventional wisdoms for many years. Unconventional wisdom works!

You would have seen the charts from the study by Prof. Jeremy Siegel in his book “Stocks for the Long Run”, my study of the long-term returns of US stocks and my 4% Rule study. These studies and these charts agree with this new high-quality study.

“Stocks for the Long Run” shows how much stocks outperform bonds & cash and how much more reliable they are in this 200-year chart:

“Stocks for the Long Run” also shows how stocks have been more reliable than bonds after 20 years or more:

I accumulated the history of US stocks for 25-year rolling periods to show how reliable they have been long term:

I did an in-depth study of the actual results of the 4% Rule over 30-year retirements in history.

This colourful chart is the actual 30-year histories with 100% in US equities. It shows that it has had a 96% success rate in history and almost all retirements ended with much more after 30 years of retirement than when they retired.

My 4% Rule study also shows how adding bonds has resulted in higher, not lower, risk of running out of money compared to all-equity investing during your retirement:

By embracing the proven power of an all-equity strategy with thoughtful international diversification, investors can unlock greater growth, reliability, and financial freedom for a more secure and abundant retirement.

Ed